Net lease retail experienced varying outcomes to the COVID-19 pandemic, but successful retailers attribute their monumental performance to their location. A tenant’s location can impact the success or failure of a business, and therefore is an important factor in the site selection process. For shopping centers, the right tenant and their location can make all the difference. This article discusses various retailers’ performance pre- and post-COVID-19 and how their location influenced their success.
Retail Performance Pre- & Post-COVID-19
The net lease retail segment experienced an unprecedented year in 2020, but certain products withstood the headwinds and came out of the pandemic stronger than ever. The clear winners are quick-service restaurants (QSRs) with drive-thrus, discount retailers, drugstores, grocery stores, and convenience stores (c-stores). Though they endured a global pandemic, these assets are riding a two-year high from impressive fundamentals that have only strengthened in the last year.
Discount retailers have been very active in 2021, with dollar stores leading in new store openings for the year, according to Coresight Research. In 2019, 1,800 discount retailers opened new stores, compared to the 1,626 slated to open this year. Dollar General achieved $27.8 billion in net sales in 2019, compared to $17.1 billion in Q2 2021. Dollar Tree, Inc. (Family Dollar & Dollar Tree) reported $23.61 billion in sales for 2019, compared to $12.82 billion reported for the first six months of 2021.
Dollar stores often target secondary and tertiary rural markets to fulfill the demand for affordable and convenient products. They are more likely to be found as freestanding properties in a strong retail corridor with a street presence, if not in regional or neighborhood shopping centers with high visibility and strong traffic counts. Though they don’t anchor shopping centers, dollar stores can bring life back to struggling centers as they are a viable and steady source of revenue. Their lack of an online presence forces them to rely on foot traffic, but dollar stores are the primary option for rural shoppers in food deserts. Due to their presence in locations with minimal competition, dollar stores have a unique advantage that leads to a tremendous sales performance.
With pandemic conditions forcing shoppers to stay closer to home, rural retail has shown more resilience than its urban and even suburban counterparts.
Though drive-thrus were in demand before the pandemic, their monumental performance in 2020 has resulted in low availability. Quick-service restaurants with drive-thrus accounted for 81 percent of U.S. restaurant visits in Q2 2021. Fried chicken giant, KFC, reported a 50 percent hike in drive-thru sales in Q1 2021, accounting for roughly 80 percent of all business. During that same time, Wendy’s reported that 90 percent of customers ordered through the drive-thru. However, QSR brands aren’t the only ones to capitalize on the convenience drive-thrus offer, with discount retailers, drugstores, and supermarkets taking up the bulk of leasing activity since the start of 2020.
Drive-thrus are often positioned to be easily accessible on busy roads with multiple entry points. Their locations cater to consumer convenience, typically accompanied by other shops. Drive-thrus are becoming more prevalent in shopping centers, particularly in retail pad sites, where real estate allows for drive-thru development. Strong national tenants usually occupy these assets, bringing in more customers to the shopping center. Their convenience and accessibility contributed to the record sales witnessed in the last two years.
Drug, Grocery, and Convenience Stores
Drugstores, grocery stores, and convenience stores are forming partnerships, implementing new initiatives, and perfecting their distribution processes to remain competitive. Drugstores are usually in shopping centers, sometimes at end-cap locations, or outparceled. They benefit from being in proximity to other shops that see customers on a routine basis. CVS and Walgreens remain the two drugstore behemoths and continue to expand in-store offerings, including groceries, to stay competitive. CVS reported total revenues of $256.8 billion for 2019 and slightly increased to $268.7 billion in 2020. In the first half of 2021, CVS reached $141.7 billion in sales, a 7.3 percent increase compared to the same time last year. Walgreens’ total sales for 2019 were $136.9 billion and slightly increased to $139.5 billion in 2020. As of Q3 2021, Walgreens reported $98.2 billion so far in total sales.
Although grocery stores see competitors sprouting across the United States, they are highly favored by investors due to their internet resistance, stability, and low-risk profile. Grocery-anchored shopping centers benefit from the daily essentials that grocery stores offer and the consistent foot traffic from routine shoppers. In 2019, traditional grocery stores reached $562.3 billion in sales, compared to $623.3 billion in 2020. Grocery store locations vary but can often be found in neighborhood shopping centers (sometimes as the anchor tenant) with complementary tenants. Given their familiarity with shoppers and convenient location, grocery-anchored shopping centers see ample activity.
Convenience stores are testing out new store formats and improving store offerings to sustain their accessibility. According to the National Association of Convenience Stores, total industry sales for c-stores achieved $251.9 billion in 2019, which more than doubled to $548.2 billion in 2020. C-stores rely on convenience to bring in customers and drive sales; therefore, they are often positioned on major intersections with high visibility and dedicated parking lots.
Factors Influencing Retail Site Selection
While some retailers’ essential nature kept their business operational through the pandemic, their location also played a significant role in their success. Though the ideal location varies from business to business, below are some variables that affect retail site selection.
- ZONING LAWS/RESTRICTIONS: It’s important to review local zoning ordinances before signing a lease or purchasing the land or real estate. Zoning laws vary from city to city, with some stricter than others. In some places, a business could be legally prohibited from operating in an area or restrict hours of operations. A tenant can file an appeal to the planning or zoning board. For example, various California markets have complex permitting processes and once banned the development of drive-thrus, claiming that they pose hazardous conditions.
- COST: A paramount concern when looking for commercial space to lease is finding a location within budget. It’s important to research the market beforehand to see average rents in the area and determine sustainable rental costs. A discount retailer will not find much success if it leases a space in a prestigious market, like Beverly Hills, where the high rental costs would translate to increased prices. Conversely, it’s imperative to consider if the business is affordable to local customers. For example, a boutique fitness brand would accomplish higher customer retention if it were to lease in a core or secondary market as opposed to a tertiary market.
- DEMOGRAPHICS: Ensure that the retail site is nearby the key demographics of the business. Whether close to home or work, a company will find more success if convenient to the target customers. It’s important to consider if a sufficient percentage of the local population fits the customer profile. Conducting demographic research on the area’s foot and vehicle traffic beforehand will help pinpoint an ideal location.
- COMPETITION: The surrounding tenants in a location should greatly influence the site selection process. While some businesses may bring in an overflow of customers to nearby shops, others, such as competitors, could potentially steal customers or draw in a demographic that doesn’t coincide with the company’s key clientele. On the other hand, surrounding tenants could complement a tenant. For example, if a health food store or smoothie bar is next to a boutique fitness brand, they can expect continued sales from active and health-conscious gym-goers.
- FOOT TRAFFIC, ACCESSIBILITY, AND VISIBILITY: Visibility and accessibility go hand-in-hand, significantly influencing a business’s foot traffic. Tenants who want to be seen from afar utilize signage that stands above tree lines and other companies. For example, McDonald’s infamous golden arches can be spotted from miles away. Additionally, a tenant should cater to customer convenience, offering several points of entry and optimal parking space, such as a c-store that is accessible from every road it parallels.
- TENANT LOCATION IN SHOPPING CENTERS: Shopping centers provide ample opportunities for tenants, bringing in shoppers for numerous motives, several access points, plentiful parking, and a complementary tenant mix. Providing signage on major roads, shopping centers further supply the tenant with visibility. Occupying a shopping center is an excellent way for tenants to grow their customer base.
A fully informed decision in the site selection process involves a complex mix of variables, ranging from zoning laws to demographic trends. Not every business fits the same criteria, so researching the location ahead of time will help narrow down options. Ultimately, finding the perfect location can influence consumers to spend more, resulting in increased sales. While several factors should be considered before leasing real estate, the right leasing representative can easily navigate the process.